Investing Excess Loans?

<p>Alright, I'm a junior right now and with my savings I should have this academic year covered (i.e. I don't have to take out any loans until summer). I did however take out about $2500 in subsidized government loans (I believe this is Stafford though not sure) for the future with the intent of putting into a high interest checking account to accumulate some extra money. My question is whether I should put this money in a Roth IRA instead. I believe it's good investment for the future and plus I don't have to report it on my FAFSA. Also, in the event I go to grad school, I can take out w/o penalty. However I will then need to file taxes which I've never done (I've been told I made so little that I don't need to file taxes). </p>

<p>Cliff notes version
- Took out federal subsidized loans for future (~$2500)
- To put in high checking rewards or Roth IRA?
- Have about $2000 in Work Study that can convert to loans, shall I do this b/c I don't intend to work (doing unpaid research instead) and do both- put some in Roth IRA and HI checking account?
- If I don't open Roth, will my savings hurt my EFC (be around $4000)?</p>

<p>Interested in this too. I have a lot of subsidized Stafford loans I could accept (that I don’t need to strictly take out), but it seems like I could do something with them.</p>

<p>I’m not really thinking of Roth IRA… my friend is telling to invest in Citigroup?</p>

<p>Wow! Really poor idea. Trying to make money with unsubsidized Staffords has the potential to put you in the poor house for decades.</p>

<p>I don’t understand why it is such a poor idea. I will be needing the loan money, just not yet since I have my savings. I don’t see the harm in taking it out early and letting it accrue interest till next year. In any event, I could just say it the other way around, using the loan money for rent and food now and invest my savings. Money is fungible. I just want some advice on where I should put the money (Roth IRA for future while accruing debt now or Rewards checking which will earn money now but may affect EFC) </p>

<p>unless you’re referring to WuTangForeva’s idea, which I think is akin to gambling with money that isn’t his.</p>

<p>You will be accruing much more interest on the loans than what you could make in a conservative investment and those earnings will also be taxed. Borrow the money only when you need it.</p>

<p>I’m only talking about subsidized (Stafford) loans, which I believe the gov’t pays interest while I’m in school. The earnings will be taxed, though I plan to invest some into a Roth IRA. It won’t affect my EFC as far I’m aware ($ in the roth) and I can take the money out w/o penalty for higher educational expenses. </p>

<p>My reasoning for my Roth is that I plan to go onto grad school and right now I’m not seriously strapped for cash which will probably be the scenario later on. I just think putting some money aside early on for the future is a good idea, even it means accumulating some debt now. (I’m not talking about a lot of $ into the roth, only made about $2000 this year). My sole intent is not to shield my savings from affecting my EFC.</p>

<p>What you are describing is a form of arbitrage, and there is nothing inherently “wrong” with the idea. Of course as you have pointed out, it only works when you are guaranteed that the rate of the borrowed money is less than the rate of invested money. In the case of a subsidized Stafford, you’re fairly safe as long as you do not put it in an instrument that can go below 0% growth. In other words, do not put it in any kind of equities.</p>

<p>The smart exit strategy if you do not use the money for later education expenses would be to pay off all the debts after graduation before the grace period on the 0% interest expires. If you cannot resist the temptation to leave it in your account and hang onto the cash, then don’t pursue this.</p>

<p>My worry with the Roth would be that you don’t end up going to grad school right after you finish undergrad. You wouldn’t be able to withdraw the money without penalty, which would eat up any interest you earned, and then some. </p>

<p>Lots of questions for you. What’s the interest rate on your subsidized Stafford? What are your plans if you don’t continue on to grad school? What’s the job outlook like for you when you finish? </p>

<p>You might want to ask your FA office what would happen to your aid package for next year if you received a $4k windfall from an outside source. It might mean you’d be offered smaller/no loans next year. Or it might mean that you would lose grants, if you’re receiving them now.</p>

<p>thanks to patriot act and other laws, US Government does monitor your accounts. </p>

<p>So funny, the guy goes to college, takes a loan (doesn’t know what it is), and expects to beat the bank. And on $2500.</p>

<p>The money put into the IRA will be added to AGI and impact the EFC.</p>

<p>Bad idea. You can only put earned money in a Roth–not interest income, and definitely not loans. Your annual Roth contribution is limited to the lesser of $5,000 ($6,000 if you were age 50 or older), or your taxable compensation. Since you don’t intend to work, you won’t have any taxable compensation; therefore, you’re not eligible for a Roth.</p>

<p>I don’t intend to work for now, but I did work over summer and made about $2000. Let me put it another way then, is it wise to invest my earnings now when I am young even though I will face debt soon. Granted, it is not a large amount I’m putting away and I don’t see myself incurring extreme debt (hopefully I can work during summer and/or fall next year) in my senior year. I took out loans for now (not much, around $2500) and going to have it liquid in a checking account. This money is for the foreseeable future, in which I will have to take loans in any event (my savings can’t cover me beyond this year). I won’t touch this money until my savings runs out (in fact I’ll have separate accounts to distinguish each). </p>

<p>I don’t believe taking out these loans and putting them away for now will affect my EFC that much as I reported $6500 in savings last March and I will have about the same amount when I file my march fafsa. The roth is the different story as I’ll have to file taxes though I made very little. I don’t intend to touch the roth unless extreme emergency, just thought it would be good to invest now rather than later if I intend to go on to grad school and may enter the work force in my late 20’s, early 30’s. In sum, I’m guess the question is should I even be thinking putting money away into a IRA while at the same time incurring debt? </p>

<p>Also, is taking out my Stafford Loans when not absolutely necessary really a bad idea. What happens if I’m not offered the same package for next year and the amount of subsidized loans is considerably less than I need?</p>

<p>edit: job prospects are decent for a bachelors in environmental science, but increase with master’s.</p>

<p>Are you going into a high paying field that you believe will have jobs when you graduate? Are others in your major, with your GPA, at your school, landing well paying jobs now?</p>

<p>Is it possible to take the Stafford loan money yourself? I thought those loans were paid directly to the school and credited to your tuition bill.</p>

<p>Yes, but you get a refund.</p>

<p>There are so many bad advice and comments here. This sounds like a good plan to me. If you need money for school later, you can take it out without penalty. If you don’t go to school, presumably you will be working and you’ll have a good start for your retirement saving. $2500 loan could be paid off pretty easily once you are working. We are not talking about a lot of money here, 10% penalty is only $250, the contribution to EFC for your asset alone will be 20%. Just try to have the discipline to never touch the IRA if you can, saving is a virtue and should be cultivated whenever possible.</p>

<p>Granted, I still need to do some research on investing and such (I’ve started reading MotleyFool and other sites dedicated to investing). I definitely don’t want to put myself in a position to go deeper into debt.As of now, I feel that investing as least some of my earnings, even if it means borrowing earlier, into an IRA is worthwhile in the long run. I still want to have a some sort of emergency fund available as well. As far as taking out my direct subsidized loans early: (1) one month in a high interest account more than covers the origination fee, (2) subtracting rent and expenses this semester offsets the influx of money into savings, so effect to EFC I believe will be minimal, and (3) reduces the need/chance to take out unsubsidized loans in the future. Furthermore, I am dealing with a relatively low amount of cash here so the risk seems very minimal. </p>

<p>The idea for opening a Roth were partially inspired by these posts by BGS:
[My</a> Best and Worst Financial Decisions So Far ? Broke Grad Student](<a href=“http://www.brokegradstudent.com/my-best-and-worst-financial-decisions-so-far/]My”>Welcome brokegradstudent.com - Hostmonster.com)
[College</a> Student’s Guide to Roth IRAs ? Broke Grad Student](<a href=“Welcome brokegradstudent.com - Hostmonster.com”>http://www.brokegradstudent.com/college-students-guide-to-roth-iras/)</p>

<p>So the plan of action:
1.) READ up on everything before taking any course of action regarding opening an IRA and investing.
2.) In the mean time, pull out the maximum amount of subsidized loans and put them in a high yield savings
3.) Set aside an emergency fund, granted not very much but at least something
4.) Open a Roth IRA </p>

<p>comments? suggestions?</p>

<p>Any money that you might need within the next five years should be in low risk invesments such as CDs or Money Market accounts. Your bank or credit union should offer Roth IRAs with those options. If not, look around for one that does.</p>

<p>Money that you won’t need for at least five to ten years (and that you can afford to lose) can go into mutual funds or individual stocks and bonds. Over the twenty plus years that you have ahead of you before retirement, chances are that these kinds of investments will recover from any losses.</p>

<p>Michelle Singletary who writes financial advice columns for the Washington Post and appears on NPR regularly, has a conservative, useful take on personal finance. You may want to check out what she’s published.</p>

<p>Good luck with it all!</p>